Monday March 19, 2018

Case of the Week

The Values-Based Lead Trust

Case:

Stacy Powers, is 40 years old and has led an interesting life. She was the only child of a successful couple. After both started careers, they decided to have a child. During the middle years of their married life, they were delighted to be blessed with a daughter. Stacy was a dream come true for the Powers.

Throughout Stacy's life, the Powers smothered Stacy with love, affection, time and money. Stacy became very accustomed to the constant "spoiling" and financial support of her parents. As a result, Stacy possessed little drive and initiative. In fact, her idea of a productive day consisted of shopping trips and hours at the salon. For years, Stacy continued on this path. While she was a good person with a good heart, the Powers felt that Stacy did not develop and mature as an adult.

During a visit with their estate planning attorney, the Powers expressed their concerns about Stacy. The Powers did not want to leave their entire estate to Stacy fearing that she would simply spend it away. Instead, the Powers wanted an estate plan that provided retirement security, financial responsibility and a love of philanthropy.

Question:

What planned gift would give Stacy philanthropic involvement? How could this planned gift be structured to provide Stacy with retirement security and financial responsibility?

Solution:

After consulting with their attorney, the Powers decided that a Charitable Lead Trust (CLT) might achieve their objectives. First, in order to involve Stacy in philanthropy, the charitable beneficiary of the CLT income stream will be a Donor Advised Fund (DAF) created in Stacy's name. Each year the DAF would distribute at least 5% to local charitable organizations based upon Stacy's recommendation. (Editor's Note: The actual distribution decisions are made solely by the charity where the DAF is funded. However, in most cases the charity will follow the recommendations of the donor and donor's family.) This yearly, active involvement with the DAF and local charities will cultivate new personal relationships and maybe even new values for Stacy.

Second, in order to meet the Powers' financial goals for Stacy, the Powers elected to create a four-layered lead trust. Not wanting to give Stacy the entire estate at one time, the layering of the lead trusts will provide Stacy with principal at different stages. The different stages hopefully will teach Stacy financial responsibility. Moreover, the different stages will ensure that there will be resources available for Stacy's later years.

The Powers, therefore, created five, 10, 15, and 20 year Charitable Lead Annuity Trusts, which accordingly will distribute assets to Stacy at ages 45, 50, 55, and 60. The Powers decided to fund the longer-lasting trust with the bulk of the assets for two reasons. First, the charitable deductions will be much larger, resulting in less gift and estate tax. Second, Stacy will be older and hopefully more financially responsible. Thus, the Powers funded the five-year CLAT with $500,000, the 10-year CLAT with $1 million, the 15-year CLAT with $1.5 million, and the 20-year CLAT with $3 million. With this plan, the Powers will transfer $6 million (plus growth) to Stacy with zero gift or estate tax and still preserve most of their applicable exclusion amounts. In addition, the DAF will receive over $7 million from the four lead trusts, which Stacy will have a major role in distributing.

While not certain of its success, the Powers feel comfort in knowing that they may provide Stacy with some opportunities to grow and mature as an adult. Consequently, the Powers are very pleased with this values-based lead trust plan.